Lehman lessons: Dick Fuld is still hung over from his home-brewed Kool-Aid. The former Lehman Brothers boss hasn’t stopped blaming his investment bank’s demise on “uncontrollable” market forces, false rumors and the lack of a government rescue. That neglects his own hubris and failure to buttress the firm. But he makes at least one fair point: US regulators were damagingly inconsistent.
The Financial Crisis Inquiry Commission may not learn much new about the well-documented Lehman collapse from this week’s hearings. In written testimony on Wednesday, Fuld again argues he and his colleagues did what they could and were still unable to stop a run on Lehman or the dramatic Sunday night bankruptcy filing that ensued. In hindsight, they didn’t do enough. But even at the time, the pugnacious Fuld seemed too dismissive of skeptics like hedge fund manager David Einhorn.
Fuld is, however, justified in highlighting the government’s inconsistency, which plainly worsened the market reaction to Lehman’s failure. He stops short of saying other financial firms with bosses just as blinded by their own hype were given a helping hand rather than cut loose – but that was the case to differing degrees with American International Group, Bear Stearns, Citigroup, Fannie Mae, Freddie Mac, Goldman Sachs and Morgan Stanley.
Harvey Miller, a Weil, Gotshal & Manges attorney who advised Lehman, rightly notes in his own written FCIC testimony that the authorities' explanations for refusing to rescue Lehman have been unpersuasive. They have mostly relied on strict legalities and small print. But rules were torn up or heavily bent in other situations. The timing of the AIG, Fannie and Freddie bailouts - all close to Lehman’s failure - and the stock of political capital in each case seems to have had at least as much to do with it.
The FCIC, due to report in December, is in many ways a lame duck. Legislation to overhaul U.S. financial regulation has already passed. Improved systemic monitoring and coordination between regulators is part of that. But there has been inadequate scrutiny of the interactions between administration officials, politicians, regulators and bankers that led to widely different outcomes. The commission could make its mark by figuring out what went awry in those dealings - and how to avoid it next time.